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Arizona鈥檚 state Senate Finance Committee met last week to discuss what the new tax law that resulted from passage of Proposition 208 last month will mean for the state鈥檚 economic future and what can be done to offset potential negative consequences. 

While the new tax is meant to tax the wealthy to help fund education, it has an unintended consequence: It will affect tens of thousands of small businesses as well. 

That could have dire consequences for Arizona鈥檚 economic health, said the chair of the committee, Senator J.D. Mesnard (R-Chandler), who scheduled the meeting to hear from legislative budget analysts and others on what the impact will be. 

鈥淲e don鈥檛 want to become a flyover state,鈥� Mesnard said when referring to Arizona鈥檚 future economic development prospects.

Arizona now in top 10 for high income tax bracket

Before the new tax was approved, Arizona鈥檚 top income tax rate was the 13th lowest in the nation. Now, economists calculate the state has the ninth highest rate in the U.S. 

鈥淗aving the ninth highest income tax rate, the 11th highest combined average sales tax rate and high business property tax, you can鈥檛 have all those things at the highest end and not have at some point a collapse in economic growth,鈥� said Mesnard, who is working with fellow lawmakers and others to find ways to lessen the impact on business and protect Arizona鈥檚 ability to attract investment. 

Initiative almost doubled top tax rate

Under the new tax law, Arizona鈥檚 top income tax rate went from from 4.5 to 8 percent 鈥� a 78 percent increase for individuals who earn $250,000 and joint filers who earn $500,000.  

Businesses that file under the individual tax code instead of the corporate tax code are also impacted. Corporate filers are not affected by the tax increase. 

Positive and negative impacts of the new tax 

At the committee hearing, Hans Olofsson, longtime chief economist for the Joint Legislative Budget Committee (JLBC), laid out the potential outcomes from the new 3.5 percent surcharge.

Using a static analysis that doesn鈥檛 account for potential secondary budgetary impacts, Olofsson estimates that the state will gain about $874 million in tax revenues for education the first year.  

Olofsson said the majority of the taxes, 75 percent, will go to increase teacher and staff salaries. With more money in their pockets, they could spend more and that will push up sales tax collections, he said. 

On the negative side, high income earners could decide to leave the state, Olofsson said. Higher tax rates also could reduce incentives for businesses to locate or expand in Arizona. 

High income tax states end up losers in the long run 

National economist Steven Moore also spoke at the meeting about what happens when states raise their income tax rates.  

Moore and fellow economist and researcher Dr. Arthur Laffer conducted an analysis for the Arizona 小红帽直播app of Commerce & Industry to determine just that. The report, 鈥淎rizona鈥檚 Proposition 208 Loses Jobs and Harms Small Businesses,鈥� analyzed how tax rates have affected states over the past 30 years.  

Almost all states with lower tax rates perform better

According to Moore and Laffer鈥檚 research, almost all states with low or zero income tax rates performed better in most economic indicators than those states with high tax rates. 

High tax states saw less revenue for government responsibilities, including education. An analysis of the 11 states that introduced income taxes since the 1960s shows they are at the 鈥渧ery bottom of performance鈥� in not only economic and population growth, but revenue for public services. 

Harsh implications for Arizona

Using data from other states, the economists measured the impact Arizona鈥檚 Proposition 208 would likely have on jobs, wages, interstate migration, tax revenue collections, state competitiveness, and small businesses.

They found that all areas would likely suffer, making 鈥淎rizona residents poorer and the state鈥檚 economy less competitive.鈥� 

Among their findings:

鈥�An estimated 200,000 jobs and about $25.5 billion in personal income would be lost over the  next 10 years. 

鈥� Fifty percent of the tax would be borne by small business owners and operators that typically generate from half to two-thirds of the jobs in a state.  

鈥� Arizona鈥檚 economic competitive position among the 50 states would fall from No. 10 to No. 16.

鈥�The state would lose 700,000 people in net in-state migration over just the next decade.

Arizona needs to find ways to keep growing

Glenn Hamer, the president and CEO of the Arizona 小红帽直播app, also spoke at the meeting to encourage state lawmakers to find a way to fund education without harming the backbone of the state鈥檚 economy, small businesses. 

Before Proposition 208, Arizona was among the fastest growing states and 鈥渁lways seemed to be a finalist when it came to big corporate announcements,鈥� Hamer said. 

Now, it will have a much harder time competing with other states that have lower or zero income taxes, he said. 

鈥淭his is something that affects all of us,鈥� Hamer said. 鈥淲e need to figure things out so we can fund education in a sustainable way, but we don鈥檛 want to do something to hurt our economy and the incredible growth we鈥檝e all enjoyed and experience with this dramatic change.鈥�